Decoding the process of a hostile takeover

What is hostile takeover? 

When an acquiring company takes over a target company (company being acquired) where the management of the target company is reluctant to offer ownership, then it is said to be a hostile takeover which contradicts a friendly takeover. The acquirer may do so through a tender offer, whereby the acquirer invites the shareholders to submit their shares in return for a premium price above the current market price. The payment can be done through cash, shares of the acquiring company or other securities. 

Another method of a hostile takeover is through a proxy fight, whereby the acquiring company can persuade other shareholders to vote on their behalf. And if they achieve enough proxy votes, it can simply replace the board of directors and vote for the acquisition process. 

Defence mechanism against hostile takeover 

Regardless of whichever method the acquiring company uses to takeover, the target managers have many ways of defence against such takeovers. Let's take a look at the two defence mechanisms which are broadly classified as pre-offer defence and post-offer defence. 

Pre offer 

Precaution is always better than cure. It is a recommended practice for managers to have pre-offer defence tactics in place to make hostile takeovers a meagre possibility. 

Some of the measures are: 

Poison Pills: This legal device gives the existing shareholders of the target company to purchase additionally issued stock at a discount if one shareholder accumulates a particular percentage of ownership. 

Poison Puts: This gives rights to the bondholders to put (sell) the bonds at a pre-specified price in case of a takeover. 

Supermajority Voting: Usually 51 per cent is considered as a majority but in some cases like a takeover, target managers change the charter to have typically 80% majority to approve such decisions. 

Golden Parachutes: It allows senior management to receive huge cash payouts if the management is to be replaced, which makes it costlier for acquirers. 

Post offer: 

Litigation: It involves suing the acquirer based on anti-trust laws. It delays the whole process. 

Shares Repurchase: The target managers would aggressively repurchase their own shares. 

Crown Jewel: It involves the selling of an asset or subsidiary to a third party in case of a takeover, which will make the acquisition less attractive. 

Pac-Man Defence: To attack is the best defence. In this case, the target makes a counteroffer to acquire the acquirer. 

White Knight: It involves letting a friendly third party buy the shares of the target company, which would be enough to block the whole process. 

This information is just an overview of some of the ways that companies usually adopt to tackle hostile takeover. Over the years, new alternatives and variations have been formed.